KKAJ Blog Archives for August 2016

August 17, 2016

Ten Potential Mistakes to Avoid in Estate Planning

Ten Potential Mistakes to Avoid in Estate Planning

Sometimes people attempt to make an estate plan without consulting legal and financial professionals. 

Mostly this is because they may have a general understanding of estate planning and believe 
they can do it themselves without paying for professional services. This may be valid to a point, but it often fails because of the detailed knowledge it requires to draft the documents that cover the nuances of their lives.
Everyone is different and a boilerplate form isn't sufficient. Here is a list of 10 potential mistakes in estate planning that you can help avoid with professional counseling.
Mistake #1: Having an outdated estate plan. Your life and financial circumstances may change and your estate plan should change with them. For instance:
•Your parents may have died so they can no longer be beneficiaries;
•Your children may have gotten married and had kids of their own;
•You may have divorced and remarried;
•Your assets have grown (or decreased) significantly; and
•You no longer own a house or you purchased property. 
Your estate plan should take these and other changed circumstances into account. It's a good idea to review your plan at least once a year.
Mistake #2: Failing to revise your will. The will you had drafted many years ago may no longer apply for the reasons listed above and others. Some people believe that if they scratch out a part of an old will, add information and initial the document, it will be valid. This is never the case.
Mistake #3: Relying only on joint tenancy to avoid probate. Many assets are transferred outside of wills. For example, joint tenancy assets pass to the surviving joint tenant. Let's say you bought your first home in joint tenancy with your brother who shared the house with you. You then had a falling out. Your brother relocated to another state and you got married. You changed your will to leave everything to your spouse, but you neglected to change the joint tenancy. The house will generally pass on to your brother, rather than your spouse.
In addition, say you and your spouse own a home as joint tenants to avoid probate. This move really only avoids probate on the first death. When the surviving spouse dies, the home will typically end up in probate. And what happens if you both die in an accident? 
Mistake #4: Not coordinating a will and a trust. Creating a trust and transferring assets to it may help you avoid probate and save taxes. However, if you have a will and a trust, be sure the documents are aligned so your wishes will ultimately be carried out. If a will and a trust are not consistent, it can lead to delays and unnecessary costs.
Mistake #5: Incorrectly titling assets. You want your intentions to be carried out for all assets, including your primary residence, vacation home, bank accounts, brokerage accounts, retirement accounts and even vehicles. Be sure to make beneficiary designations and properly title accounts. Designate a beneficiary (or beneficiaries) on IRAs, 401(k)s, company plans and other accounts. Take time annually to review them as they will control the distribution of those assets.
Why is this important? Assets could wind up in the hands of people you never intended. For example, there have been many cases where a couple divorces but one spouse forgets to update a beneficiary designation on a 401(k) plan. The ex-wife then receives the account balance -- regardless of what the decedent's will says.
Mistake #6: Not naming successor or contingent beneficiaries. Let's say you name one beneficiary on an account and that individual dies. If you don't update the beneficiary designation, there will be no successor to receive the account assets. In this case, the assets may go to someone you didn't want to receive them -- or they may wind up in your estate. It's important to name more than one beneficiary on accounts and to keep your designations up to date.
Mistake #7: Failing to name a person to make health care decisions. You've probably heard about the nightmare that can occur when family members don't agree what to do with a loved one on life support. 
All 50 states permit you to express your wishes as to medical treatment and to appoint someone to communicate for you in the event you become incapacitated. Depending on the state, these legal documents are known as living wills, medical directives, health care proxies or advance health care directives. On one of these legal documents, designate someone you trust to follow your wishes.
Mistake #8: Relying on outdated or stale financial powers of attorney. You may have selected someone to make financial decisions for you with a power of attorney. However, after you signed the document, your circumstances or your relationship with the person may have changed. Consult with an attorney about how to proceed.
Mistake #9: Failing to consider Medicaid planning. Many people wait too long to plan for a nursing home or extended care and then want to apply for Medicaid. These issues should be reviewed long before a person nears the time when long-term care may be necessary.
Mistake #10: Thinking that estate taxes don't apply. With the current relatively generous federal estate tax rules (a $5.45 million exemption for 2016), many people believe their estates won't be liable. But keep in mind that many states have their own death taxes. If you live in one of these places, your estate can be exempt from the federal estate tax but still exposed to a significant estate tax hit imposed by your state. Don't just focus on the federal rules. Consult with your estate planning advisor to minimize state taxes and ensure you establish domicile in the state that you want.
These issues can be complex. Speak with your estate planning advisor to help ensure you have a proper and solid estate plan so that your heirs are taken care of in the way you wish. 

August 3, 2016

7 Tax-Savvy Ways to Give to Charity

7 Tax-Savvy Ways to Give to Charity

Charitable giving is on the rise. And the momentum is expected to continue, given the natural disasters and human tragedies that have happened in recent months. 
Last year, charitable donations reached an all-time high of approximately $373.25 billion, according to Giving USA 2016: The Annual Report on Philanthropy for the Year 2015. This report is published jointly by the Giving USA Foundation, a public-service initiative of The Giving Institute and the Indiana University Lilly Family School of Philanthropy.
Besides fulfilling their philanthropic needs, donors may also benefit from charitable deductions on their personal tax returns. If you're considering donating to a new cause or a long-standing favorite one, remember that gift-giving may come in many different forms. Here are seven ways you can offer support:

1. Monetary Contributions

If you donate cash to a qualified charity, your gift is generally tax deductible. The same holds true for cash-equivalent contributions, such as an online payment to the charity using a credit or debit card. 
Important note. To determine if an organization qualifies as a charitable organization, go to the IRS Exempt Organizations Select Check. Giving money to an individual or a foreign organization is generally not deductible, except for donations made to certain qualifying Canadian not-for-profits. Political donations also don't qualify for a deduction.
The deduction limit for your total annual donations, including cash gifts, is 50% of your adjusted gross income (AGI) (or 30% to the extent donations are made to a private foundation). Any excess may be carried forward up to five years. In addition, the tax code imposes strict recordkeeping requirements for charitable contributions. For example, if you make a cash donation of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity that states the amount of the donation and whether any goods or services were received in exchange for it. 

2. Gifts of Property

You may also donate property — such as marketable securities, artwork or clothing — to a qualified charitable organization. In some situations, this can result in an extra tax break: For property that would have qualified for long-term capital gains treatment had you sold it — such as marketable securities you've owned longer than a year — you may deduct the full fair market value of the property. Thus, the appreciation in value while you owned the property will never be taxed.
For you to deduct the fair market value of gifts of appreciated tangible personal property, the property must be used to further the charity's tax-exempt mission. For instance, if you give a work of art to a museum, it has to be included in its collection, rather than auctioned off at a fundraiser. Gifts of appreciated property are limited to 30% of your AGI, subject to the same five-year carryforward rule as cash gifts. 
For you to deduct gifts of clothing or household goods, the items generally must be in good used condition or better. Your deduction equals the current fair market value of the item, which likely is substantially less than what you paid for it. 
For a donation of property worth $250 or more, you must obtain a contemporaneous written acknowledgment from the charity describing the property, including a statement of whether any goods or services were received in exchange for the donation and a good-faith estimate of the gift's value. Note that an independent appraisal generally is required for a charitable gift of property valued above $5,000 other than publicly traded securities.

3. Quid Pro Quo Contributions

In some cases, a charitable donor may receive a benefit in return for the contribution. These are referred to as "quid pro quo contributions." If you make a donation at least partially in exchange for goods or services exceeding $75, the charity should provide you with a good faith estimate of the goods and services received and the amount of payment exceeding the value of the benefit. Your deduction is limited to the difference between these amounts.
For example, suppose you attend a charitable fundraising dinner. You pay $200, but the charity values the meal at $50. In this case, your deduction is limited to $150. Low-cost trinkets and nominal gifts, such as a mouse pad featuring the charity's logo, won't reduce your deduction.

4. Volunteer Services

Unfortunately, you can't deduct the value of the time you spend helping out a qualified charity. But you may be eligible to write off out-of-pocket expenses you pay on behalf of the organization. This includes such items as travel, mailing costs and lodging at a convention where you're an official delegate. But travel expenses aren't deductible if the trip is merely a disguised vacation. 
If you have to buy special clothing for your charitable activities — such as a Boy Scout or Girl Scout uniform for a troop leader — the cost is deductible. And any uniform cleaning costs also may be deductible as a miscellaneous expense, subject to the usual 2%-of-AGI floor. 

5. Donor-Advised Funds

A donor-advised fund may appeal to someone who wants to retain some control over how the charity will spend his or her contributions. Typically, these funds are established with a reputable institution that vets charities for you and doles out money based on your recommendations. A minimum deposit of at least $5,000 may be required.
As with other donations to qualified charities, contributions to a donor-advised fund are fully deductible within the usual rules and limits. Donor-advised funds are usually easy to set up and maintain because the institution does all the administrative work for you. If you want to stay out of the limelight, you can even arrange to make your gifts anonymous. The increase in the popularity of donor-advised funds has been documented in the Giving USA reports in recent years.

6. Booster Clubs

Do you support your alma mater or a local college by contributing to its athletic booster club? Typically, these clubs enable you to purchase preferred seating at the school's sporting events. For example, booster club members might receive priority ticket ordering privileges for home football and basketball games. 
Under the current rules, you can deduct 80% of the cost of a donation made to a booster club. Any part of the payment that goes toward the purchase of actual tickets is nondeductible. But you might want to grab this tax break while it's still available: The Obama administration has advocated its repeal and support for repeal is also growing in Congress.

7. Conservation Easements

Usually, you must give something away in order to claim a charitable donation deduction. However, under the rules for conservation easements, you can donate an interest in real estate to a qualified organization, such as a government unit or publicly supported charity, without relinquishing ownership and still qualify for a deduction. The donation generally preserves or protects the land or building in its current state so it can be viewed or studied.
The amount of the deduction is based on the difference between the fair market value of the land with and without the easement. Under special rules, the annual deduction is limited to 50% of AGI (or 100% for farmers and ranchers), as opposed to the usual 30%-of-AGI limit. Any excess may be carried forward for up to 15 years instead of five years. This tax break was recently made permanent by the Protecting Americans from Tax Hikes Act of 2015.
The catch is that the gift must be made in perpetuity. In other words, you or your heirs can't alter the property or rescind the organization's rights to the property at a later date.

Considering a Charitable Donation?

There are many creative gifting options available to philanthropic individuals — and many types of donations also qualify for a tax break on your federal return. But special tax rules may apply, so consult with a tax adviser to help ensure that your donation is deductible and your recordkeeping is sufficient.

Highlights of the Giving USA Report

A recent report, Giving USA 2016: The Annual Report on Philanthropy for the Year 2015, shows charitable-giving trends based on contributions made by individuals, foundations, estates and corporations. Here's the breakdown of where donations came from and how much they increased in 2015: 
Source                        Amount donated               Increase from 2014 to 2015 
Living individuals         $264.58 billion                     3.8% 
Foundations                $58.46 billion                       6.5% 
Charitable bequests    $31.76 billion                       2.1% 
Corporate giving          $18.45 billion                       3.9% 
Total                            $373.25 billion                     4.1% 
Contributions from living people accounted for about 71% of the total donations, underscoring the importance of individual donations. For a free copy of this report, visit The Giving Institute's website.